Retail inflation cools to record low in June, factory output shrinks in May

NEW DELHI: Industrial growth slowed to a three-month low in May, possibly due to adjustments in production ahead of the July 1 roll out of goods and services tax. Industrial production grew 1.7% in May, according to data released on Wednesday, down from 2.79% in April and 8% in May last year.

“With speculation of increase in prices post the implementation of GST, major offloading of inventories took place in the month of June. Destocking and inventory control due to GST impacted more than expectations,” CARE Ratings’ chief economist, Mandan Sabnavis, said. The manufacturing sector, which has the largest weight in the Index of Industrial Production ( IIP), expanded just 1.2% in May, compared with 2.3% in April and 8.6% a year earlier.

Power generation was up 8.7%, while mining output contracted 0.9%. June could be worse due to a possibly stronger GST-related adjustment. Indranil Pan, the chief economist at IDFC Bank, said he expects the impact of GST to reflect in June data as well. “The implications of GST were destocking due to which lesser number of goods were pushed to dealers.”



In capital goods, a key indicator of investment, production fell 3.9%. The only bright spark in the numbers was a 7.9% increase in the production of consumer non-durables, or fast moving consumer goods, which suggests some recovery in rural sentiment. Consumer durables output fell 4.5%.

GST PUSH
GST-related adjustment may have dented industrial growth in the run up to the rollout of this big reform, but the same is expected to provide an impetus going ahead.

Experts expect industrial output to grow in the upcoming months to meet fresh demand and rebuild inventories. “We expect a reversal in this trend and restocking to begin August onwards,” Sabnavis said.

Increased consumer demand due to a favourable turnaround of monsoon, award of higher housing rent allowances to government staff and festive demand after September could also catapult industrial output.